US v. D Bar D Enterprises, Inc.

• Decision Date: 27 June 1991
• Docket Number: No. CV-S-89-161-HDM(RJJ).,CV-S-89-161-HDM(RJJ).
• Citation: 772 F. Supp. 1167
• Court: U.S. District Court — District of Nevada
• Parties: UNITED STATES of America for the Use of the TRUSTEES OF the ELECTRICAL WORKERS LOCAL PENSION FUND, et al., Plaintiffs, v. D BAR D ENTERPRISES, INC., a Utah corporation, a/k/a C & D Electric, et al., Defendants. FIDELITY DEPOSIT COMPANY, a Maryland corporation, Third Party Plaintiff, v. Robert L. STODDARD, Deanna Stoddard, and Does I — X, inclusive, Third Party Defendants.

772 F. Supp. 1167

UNITED STATES of America for the Use of the TRUSTEES OF the ELECTRICAL WORKERS LOCAL PENSION FUND, et al., Plaintiffs, v. D BAR D ENTERPRISES, INC., a Utah corporation, a/k/a C & D Electric, et al., Defendants.

FIDELITY DEPOSIT COMPANY, a Maryland corporation, Third Party Plaintiff, v. Robert L. STODDARD, Deanna Stoddard, and Does I — X, inclusive, Third Party Defendants.

No. CV-S-89-161-HDM(RJJ).

United States District Court, D. Nevada.

June 27, 1991.

Patricia F. McAllister, Dennis M. Sabbath, Sabbath & Christensen, Chtd., Kevin Christensen, Las Vegas, Nev., for plaintiffs.

Leon Denney, pro se.

Alan J. Lefebvre, Kurt C. Faux, Beckley, Singleton, Delanoy, Jemison & List, Chtd., Michael E. Talbert, Gregory T. Hafen, Hafen & Mayor, Ltd., Donald E. Brookhyser, Jolley, Urga, Wirth & Woodbury, Las Vegas, Nev., Debria K. Denney, Boise, Idaho, for defendants.

ORDER

McKIBBEN, District Judge.

This case originated with a complaint by the trustees of the Electrical Workers' Local pension fund against D-Bar-D Enterprises and two other related companies (D-Bar-D) for failing to pay union wages and fringe benefits according to a labor agreement. Some of the wages and benefits were for employees working on projects on which third-party defendants Stoddards were the general contractors and D-Bar-D were subcontractors. Defendants Insurance Company of the West (West) and Fidelity Deposit Company (Fidelity) issued performance and payment bonds and a Contractor's License Bond, respectively, to Stoddards. According to the complaint, Stoddards filed for bankruptcy in February 1989 and plaintiffs were precluded from proceeding against them directly. Therefore, the trustees filed its complaint against the insurance companies to attempt to recover on the bonds. Fidelity filed a third-party claim against Stoddards for indemnification.

Fidelity settled its claim with the union trustees for nine thousand, one hundred and fifty dollars ($9,150), approximately one-half the amount the trustees were seeking from West and Fidelity. West also settled its claim. Fidelity now seeks reimbursement of the settlement amount from the Stoddards pursuant to an indemnification clause contained in the bond agreement. Stoddards have filed a motion to dismiss (# 65). Fidelity has filed a cross motion for summary judgment (# 70).

FACTS

In March 1982, Fidelity issued a contractor's licensing bond to Stoddard Building Company. As part of the bond agreement, Robert and Deanna Stoddard (third-party defendants) agreed to indemnify Fidelity against all liability for losses and expenses incurred by reason of having executed or procured the contractor's bond. The bond agreement also included a clause whereby Fidelity retained the right to settle any claims on the bond unless the Stoddards requested Fidelity to litigate the claim and deposited collateral with Fidelity to cover litigation expenses.

Stoddard was the general contractor on two federal projects in Nevada (Nellis A.V.D.S. Dormitory) and a subcontractor on a third (Tonopah Gas Station). D-Bar-D had subcontracts with Stoddard on all three projects. The union trustees brought an action against D-Bar-D claiming that D-Bar-D failed to pay union wages and fringe benefits to employees who worked on the three Stoddard projects in 1987 and 1988. The complaint included a cause of action against the two sureties, West and Fidelity, claiming that Stoddard was liable for the debts of the subcontractors under Nevada Revised Statutes §§ 608.150 and 624.273. (The trustees did not sue Stoddards directly because they were in bankruptcy.)

Fidelity contends that, after conducting substantial discovery, it determined that the trustees' claims appeared to be valid, and that the amount claimed was reasonable or perhaps even lower than that actually owed. In addition, Fidelity argues that West may have been able to avoid liability, leaving Fidelity liable for the full amount. Based on its investigation, Fidelity settled the matter. Fidelity recognized a possible defense on the ground that the Employee Retirement Income Security Act (ERISA), 29 U.S.C. § 1132(a)(3), preempts the trustees' state law cause of action. However, Fidelity maintains that the law in this area is unclear and that it settled the claim in good faith. Fidelity now claims that Stoddards must reimburse it for the settlement amount and expenses incurred in litigation up to the time of settlement.

Stoddards, as third-party defendants, argue that they are entitled to assert any defenses as may be raised in the original complaint under Fed.R.Civ.P. 14(a); that Fidelity could have asserted a preemption defense in the claim against them; that Fidelity settled the claim in bad faith; and that they were not given notice of the settlement as required by Nevada law and so are not liable to Fidelity.

ANALYSIS

Fidelity argues that, under the terms of the indemnification agreement, Stoddards are required to indemnify them for the amount paid out in settlement and defense of the trustees' claim. Stoddards argue that Fidelity has failed to show the original claim against it would not have been preempted by ERISA, that the settlement was not reasonable, and that the indemnification clause is ineffective because Fidelity failed to give Stoddards notice before settling the claim.

The indemnification agreement provides that Stoddards will indemnify Fidelity "from and against any and all liability for losses and/or expenses of whatsoever kind or nature (including, but not limited to, interest, court costs and counsel fees) and from and against any and all such losses and/or expenses which the Surety may sustain and incur" by reason of having executed the bond. The agreement further provides that Fidelity

shall be entitled to charge for any and all disbursements made by it in good faith in and about the matters herein contemplated by this Agreement under the belief that it is or was liable ... or that it was necessary or expedient to make such disbursements, whether or not such liability, necessity or expediency existed....

Under the agreement, evidence of payment by Fidelity is prima facie evidence of Stoddards' liability to Fidelity.

The indemnification agreement included a waiver of notice of execution under the bond and agreement. In addition, Fidelity retained the right to settle or compromise any claim unless Stoddards requested that the claim be litigated and deposited collateral with Fidelity to cover litigation costs.

The general rule of indemnification, in the absence of an express agreement, is that actual liability must be sustained by the indemnitee, and that if an indemnitee settles a claim, it must prove actual liability to be entitled to indemnification. Where a written indemnification agreement exists, however, the indemnitee need show only potential liability. Hawaiian Insurance and Guaranty Co. v. Higashi, 4 Haw.App. 608, 672 P.2d 556, 558 (1983). "A court confronted with such an agreement should insure that the claim was not frivolous, that the settlement was reasonable, that it was untainted by fraud or collusion, and that the indemnitee settled under a reasonable apprehension of liability." Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1218 (5th Cir.1986). There is no allegation or evidence of fraud or collusion in this case.

Where an indemnification agreement subjects the right to settle a claim to the sole discretion of the surety, the parties may expect that the surety will settle only after reasonable investigation of the claims, counterclaims, and possible defenses. City of Portland v. G.D. Ward & Assoc., 89 Or.App. 452, 750 P.2d 171, 175 (1988). Finally, the Nevada Supreme Court has held that a surety has an obligation to notify the indemnitor before paying a third party under the bond. Palevac v. Mid Century, 101 Nev. 835, 837, 710 P.2d 1389 (1985).

Stoddards assert that the Plaintiffs' claim against Fidelity based on Nev.Rev. Stat. §§ 608.150 and 624.273 are preempted by ERISA and therefore Fidelity could not have settled in good faith. The state statutes provide that "original" contractors are liable for their subcontractors' indebtedness and recovery on bonds. Although a strong argument for preemption exists, Fidelity argues that because the law in this area is less than "crystal clear," it determined to settle the claims. Under the indemnification agreement, Fidelity is entitled to reimbursement if it can establish potential liability.

The court need not determine whether the trustees' state law claim here is in fact preempted by ERISA. The issue must be addressed only to determine if Fidelity acted reasonably in concluding that it faced potential liability.

In Pilot Life Insurance v. Dedeaux, the Supreme Court held that state laws and causes of action relating to ERISA-governed plans are preempted. 481 U.S. 41, 107 S.Ct. 1549, 95 L.Ed.2d 39 (1987). The same year, the Court held that a Maine plant-closing statute that required employers to give laid-off employees severance pay was not preempted. Fort Halifax Packing Co. v. Coyne, 482 U.S. 1, 107 S.Ct. 2211, 96 L.Ed.2d 1 (1987). The Court distinguished between laws that affect employee benefits and those that affect employee benefit plans, and held that only the latter are preempted. Id. at 7-8, 107 S.Ct. at 2215-2216. In Fort Halifax, the Court held that the purpose of ERISA preemption is to protect employers from conflicting plan administration requirements, and that these concerns are not implicated where only benefits, and not benefit plans, are involved. Id. at 8-9, 107 S.Ct. at 2215-2216.

The Court has also distinguished between state laws that explicitly refer to ERISA plans and those that do not single out ERISA plans but may have an effect on them. In Mackey v. Lanier Collections Agency & Service, the Court held that a general garnishment statute was not preempted, even though it was applied to benefits under an ERISA plan. 486 U.S. 825, 108...